Originally published by AxiTrader
2017 was a fairly quiet year in terms of volatility in global markets, especially in FX. While there was not necessarily a lack of events or surprises in the past year, markets did not move much. The rally in global equities continued, with only a few minor corrections. Meanwhile, FX traders had to be patient as the major FX pairs were trading within a relatively tight range for longer periods.
2018 could be the year when volatility returns – in both stocks and FX. What could drive volatility in the new trading year?
Geopolitics. US President Trump and his administration made it clear that they want to put “America First”. This means trade protectionism, and potentially even a trade war. Trump´s comments have been quite hostile, especially against China. Further, some of his administration members even made an effort to talk the dollar lower, as we saw last week. A real trade war would be negative for the dollar in total, but also dampen the mood in the global equity markets.
Central bank meetings are no longer boring. At the beginning of 2017, the monetary policy outlook seemed quite clear. There will be a few rate hikes from the Federal Reserve, but the other central banks will likely keep rates unchanged. There were a few surprises though, especially from the Bank of Canada and Bank of England. Further, the ECB signaled the shift in monetary policy. This year should bring central bank meetings that are less predictable, which also means higher volatility.
Inflation could pick up. 2018 could be the year where inflation finally picks up properly. Especially in the Euro Zone, economic growth has been very stable, it is only the inflation rate that has remained rather low. However, this could change as wages are showing signs of a pick-up as well. Higher inflation would lead to higher rate expectations, and bring stock markets increasingly under pressure. Equity bulls have had a smooth ride in the past few years, but 2018 could be bumpier.
Commodities. Volatility on commodities has increased as well. With the weak Dollar and uncertainty around the future OPEC policies, volatility in oil should remain at elevated levels. It is now just oil though. Higher inflation should have a positive effect on the commodities in general. A weak dollar also led to a surge in gold demand, and this will only increase if the stock markets start to tumble.